TREASURIES-U.S. yields climb as investors anticipate hawkish Fed minutes

By Davide Barbuscia NEW YORK, Aug 17 (Reuters) - U.S. Treasury yields climbed on Wednesday ahead of the release of minutes of the U.S. Federal Reserve's July meeting that investors anticipate will likely reaffirm the central bank's focus on hiking rates until inflation is under control. The minutes, due out at 2 p.m. EDT (1800 GMT), could help clarify what would prompt Fed officials to deliver a third straight 75-basis-point rate increase at their Sept. 20-21 meeting, and what might lead them to limit upcoming increases to half-percentage-point increments. Data since the Fed's last policy meeting showed annual consumer inflation eased in July, which led many investors to price in a 50-basis-point rate increase next month. U.S. producer prices also fell last month, amid a drop in the cost of energy products. "The most important thing that's happening today is the Fed minutes are coming out, and considering that they will account for the meeting in July, which came before the CPI (Consumer Price Index) and the PPI (Producer Price Index) prints, they're likely to be very hawkish," said Thomas Hayes, chairman and managing member of New York-based Great Hill Capital. "I think the market is front-running that, getting ahead of it," he said. Benchmark 10-year U.S Treasury yields rose to 2.884% from 2.824% on Tuesday, while two-year note yields rose to 3.351% from 3.251%. The U.S. central bank has raised its benchmark overnight interest rate by 225 basis points since March to fight four decade-high inflation. The rapid tightening of financial conditions, however, has led investors to weigh inflation concerns against recessionary fears, with markets oscillating between the two narratives. According to Commerce Department data on Wednesday, U.S. retail sales were unchanged in July, as declining gasoline prices weighed on receipts at service stations, but consumer spending appeared to be holding up, which could assuage fears that the economy was already in recession. "While overall retail sales were unchanged in July, the details were far more encouraging, with a price-related fall in gasoline sales freeing up households to increase spending on other goods," Michael Pearce, Senior US Economist at Capital Economics said in a note. Treasury yields edged higher after the retail sales data. Meanwhile, signals that inflation was still running hot around the globe contributed to concerns that central banks will likely continue their tightening. New Zealand's central bank on Wednesday delivered its seventh straight interest rate hike and signalled a more hawkish tightening path over coming months, while British consumer price inflation jumped to 10.1% in July, its highest level in just over 40 years. "Certainly those headlines are noted, and rate hikes do have some impact on U.S. Treasuries," said Hayes. Fed funds futures traders on Wednesday were pricing in a 47.5% chance of a 50 basis-point hike in September and a 52.5% chance of a 75 basis-point increase. Earlier this week, bets were more skewed towards a 50 basis-point hike. August 17 Wednesday 9:54AM New York / 1354 GMT Price Current Net Yield % Change (bps) Three-month bills 2.6275 2.6818 0.021 Six-month bills 3.0675 3.1591 0.044 Two-year note 99-87/256 3.3518 0.101 Three-year note 99-134/256 3.2935 0.102 Five-year note 98-170/256 3.0425 0.082 Seven-year note 97-208/256 2.9756 0.071 10-year note 98-216/256 2.884 0.060 20-year bond 98-100/256 3.362 0.042 30-year bond 97-60/256 3.1431 0.028 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 29.50 0.00 spread U.S. 3-year dollar swap 10.75 -0.25 spread U.S. 5-year dollar swap 3.00 0.00 spread U.S. 10-year dollar swap 4.00 0.00 spread U.S. 30-year dollar swap -32.00 0.25 spread (Reporting by Davide Barbuscia; Editing by Hugh Lawson)